Episode 93: Sharpening Your Financial Skill Set with Giff Constable
Melissa Perri welcomes Giff Constable to this episode of the Product Thinking Podcast. Giff is a product leader and former CPO of both Meet Up and Neo. Giff is passionate about helping product people sharpen their financial skills, which is a big topic of conversation in this episode. He talks to Melissa about why it’s key that product executives understand the nuances of financials, the most important relationships for a product executive to cultivate and how, why Giff never regrets investing time in the exercise of creating FP&A models, the ins and outs of understanding valuation, and so much more.
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Here are some key points you’ll hear Melissa and Giff explore:
Giff talks about his career path and how he ended up in CPO and CEO roles.
When communicating in a corporate space, adjust your language depending on who you're speaking to, with the goal of finding common ground.
Giff explains the FP&A model.
Nothing changes user behavior more than your pricing model. Adjust your pricing model so that the majority of your customers are satisfied. "When both the customer and the company are being successful together, everyone's reinvesting, everyone's happy," Giff tells Melissa.
Product leaders should build a relationship with their teams. An easy way to do this is to involve them in decision-making. Trust is built. You don't have to do everything by yourself or work in silos.
Valuation has to do with what someone is willing to pay for what you have. Companies are valued with a multiple of their top or bottom line. Lower growth companies are valued in the multiple of the bottom line. Higher growth companies tend to be valued as a multiple of revenue.
How fast or slow a company grows has to do with its product. If a company has poor prioritization or if there are market shifts, its product will become obsolete and contribute to slow growth for the company. For larger companies, there's also the risk of being so far ahead that you don't see who's catching up with you, and by the time you do, it's too late. Prioritization and paying attention to market trends and shifts are key.
Resources
Giff Constable | LinkedIn | Twitter
Transcript:
Melissa:
Hello and welcome to another episode of the Product Thinking Podcast. Today we're talking to Giff Constable, and Giff is a product leader. He's a former chief product officer of Meetup and the former CEO of Neo, which was an innovative consulting firm, and that's where I met Giff uh, in New York City. He's also the author of Talking to Humans and Testing with Humans, and I'm so excited for him to be here today. Uh, he's gonna talk to us all about how we communicate better with executives, how we use finance to become better product leaders, uh, and how we can communicate well with our team as a product leader as well. So, welcome Giff.
Giff:
Thank you so much, Melissa. Great to see you again.
Melissa:
Yeah, it's great to be talking to you about this and I know that you are as passionate as I am about helping product leaders get a little more financial savvy. So I'm excited to dive into those topics with you. But before we launch into that, can you tell us a little bit about, um, you know, your career path in product management and how you got to be in the CPO and the CEO roles?
Giff:
Sure. I mean, when you get to my age, uh, I, I started in the work world in the mid nineties to date myself. Uh, there's too many stories to tell, but the, my sort of career has two halves. The first half was really on the business side working with startups, and the second half was more on the product side. Um, when I first started the startup I joined, which was about a hundred people called Trilogy, didn't have product people. It had business people wearing different hats, and it had engineers. And eventually it realized, Oh, our software isn't very usable. So they started building an hcis practice, but I naturally gravitated. I was, I sort of was this natural bridge between the business side and the engineering side. Um, and that kept on happening over and over again through different startups.
Um, I've worked in, in enterprise Software and virtual worlds, lots of different things. And so about halfway through my career after starting and selling one startup, I realized that my real joy, like if my pig in mud happy place, was working with designers and engineers and just other product people. So I really focused my, um, really where I was going on the, on the product side first at Neo. Um, working with a lot of folks that, you know, like Jeff Gothelf to David Bland and Josh Sedein and others. And, um, and then I ran a product at a place, a marketplace called Axial and then CPO at, at Meetup. Um, so it's, yeah, it's a tale of two sides. What I love about product is that you get to be a generalist. That it's, it allows you, there's so few roles where you can use, you could play with lots of different skills, like founder of a startup is one cuz you do everything and CEO is another. Cuz you look across the whole business. And then barring those two spots, product is, is the next one. So it's been a good home for me.
Melissa:
That's great. So when you were making the leap to between, uh, you know, product manager into these executive levels, what was the most surprising thing to you about what you needed to change or how you needed to adjust your skill set?
Giff:
Yeah, that's a tough one to answer because honestly, I became an executive first in some ways, you know? Uh, and then, and then in starting companies and, and in just getting hands on with things. So when you're in small companies, you do everything, uh, sort of working directly as a, as a more formal product manager and then coming back to the executive suite. Uh, so it's a little weird for me to sort of think through that in some ways. But I do know areas where people get tripped up. I've seen it, uh, uh, often and, and one of the big, what I, and there's a class I teach for product faculty, and one of the things I say is that the glass ceiling, I see this over and over again. Um, and there's a mutual, uh, Fred that we have, Shelly Perry, who says the same thing, like this glass ceiling for product people is finance, is just understanding the finance side.
We, we go deep as product people. We go deep into analytics and metrics and behavior. Um, but really connecting that to finance and understanding that language of finance is, is a big one. Um, there's other ones as well around just how you communicate with your peer set that your first team is now the other executives, it's not just, um, design and engineering anymore, it's the general counsel, it's the cfo, it's the head of sales, um, that becomes your first team and you have to, um, really sort of, it's, it's a new kind of cross-functional team. Um, and the last one that I commonly talk about is that the whole business becomes your product. So you still use all that product thinking skills you have, but you're really thinking about the whole engine. You're designing the revenue model, how pricing works, how the product is sold and delivered, you know, et cetera. And so your definition of product becomes much more expansive. And if you could make the leap on all those sort of different areas, then, then it's a very natural transition. Um, that's sort of the, the top things that come to mind.
Melissa:
Yeah, that financial one. Um, I've seen kind of nip people in the bud when they're trying to, to make that leap or when they're trying to talk to executives. And I think that's probably one of the more common questions I get from product people is like, how do I talk to my executives or my executives just don't get it? And I always explain what I do, but they're, they're not there. Like, they're not, they're not rocking what I'm talking about. Um, and I find that they're not really speaking the same language as the executives in the team. So having, you know, been an executive yourself, maybe can you tell us a little bit about what does, you know, for the people who don't know, what does that look like on a day to day basis? Like what do executives care about? What are you talking about all the time and how should you tailor your language as a product person to make sure the executives are understanding the right level of what they need to to?
Giff:
Yeah, absolutely. The, the, and no one's gonna be surprised by this answer. The language is gonna differ depending on who you're talking to, right? It's a really, it's a important skill to, uh, learn to adjust, uh, how you speak depending on who you're speaking to and, and find that common ground. So there's two partnerships. If you're gonna be a product executive, not just a product leader, but a product executive, there's two beyond the partnership with the ceo, which is obvious and important, that are really, really key. One is with the cfo, and one is with whoever's head of sales, um, chief revenue officer, VP of sales, whatever. Those are not always great relationships when you look out there. Um, but they should be, they can be fantastic relationships. And the way they become great relationships is that the other person believes that you're in their corner, believes that you care about what they care about.
So let's take ahead of sales or whoever is in charge of breaking money in the door, uh, to your company, right? If they believe that you care about bringing money in the door and that you care about them making lots of money, usually they go into that job because they wanna make lots of money. Uh, salespeople, you know, have a scorecard. How much do they sell? What kind of commissions do they get? Um, they thrive off of that scorecard. You have to understand that, and you have to, when you're talking to them, you have to be talking in terms of numbers, in terms of sales, in terms of okay, understanding and care about their, the engine that they're building. Um, how, how, what you, the initiatives, what, you know, ultimately whether they care about that, what you're doing is going to allow them to sell more, right?
Or retain more, or however they're compensated. And so translated, I don't, they might be interested in the, the fuzzy stuff, the strategy stuff, the this feature, and here's the behavior, it's gonna change for the user, but the, when it comes down to it, right? It's like, what's the nuts and what's of dollars and cents here? And that's the same whether you're talking to the head of sales or whether you're talking to the cfo, or honestly, if you're talking to the board, the, it gets nuanced. The details that you care about with different ones. When you're talking to a cfo, it's not just about sales. They're thinking about the entire p and l. They might be even be thinking about timing of cash flows, right? The, the, the entire system of money in and out of the organization, how the place is capitalized, how much debt is covered, Do you understand those issues?
Do you understand, uh, and care and clearly care about what the business, where the business is strong and where the business is weak. And so building up enough awareness of that, um, and making sure that that's a direct part of your conversation. Uh, here's a case in point when we brought a new CFO, chief financial officer, into Meetup, right around the same time I was coming in and they were trying to create a new forecast for the business. Now a finance person isn't going to understand the complicated workings of a marketplace, a software marketplace, internet marketplace, like Meetup right out of the gate, unless they've spent a lot of time in marketplaces, but oftentimes they're, they're not. What I did is I built my own sort of FP&A model in a spreadsheet on the side, not thinking that that was going to be used by the company.
But what it did is I handed this to the CFO and it helped the CFO understand how I saw the engine, how people came in, how they were converted into customers, how they were retained, all this stuff. The, when you look at a spreadsheet, it's a logic tree, right? And so they were able to see, uh, how I thought about the business and it, and it, they were so thankful for it because, you know, otherwise they were gonna be doing a rather generic abstract version of, okay, we have this much sales, this retention, um, and this is, you know, here's our top line. Here's our gross margin, here's our bottom line. But not having as nuanced in understanding is deep in understanding of the levers. So here's something I did both for myself, but also for them. And that made them feel like, okay, this person really cares about, um, the finance of this business.
And so much of it is just about that. Do they believe that you care about what they care about? Um, and it's hard for you to do that with, with authenticity if you don't understand it. Now, if you don't understand this stuff at the beginning, that's okay. As long as you're clearly interested, motivated in asking a lot of questions, if they see that you really wanna learn, then you're like, Okay, I got a budding partner here, and they'll invest in you. There's just, they'll be thankful for it. Um, so you don't have to be the expert, but once you have that expertise, boy, it allows the relationships to thrive.
Melissa:
So for those who are not super familiar with this concept of an F P N A model, what does it, what does it mean and how do you approach building it? Like why, why did you go, I need this, What did it help you do?
Giff:
Hmm. Yeah. So I'm trying to understand. So what, what is a, this is, um, any of you product people listening, if you've ever built a spreadsheet that tries to design out the outcomes of whatever it is you're building, the feature piece of infrastructure or whatever, but you say, What do you think this is gonna lead to this change in growth, We think it's gonna lead to this change in retention, whatever it is, you've probably designed a little, or hopefully you've designed a little spreadsheet that says, Okay, here are the inputs. Here's, here's now what happens, and here's a change that's gonna come out. And given this, we think we're gonna have a range of 10 to 20% lift, right? Instead of just picking that number from there, you model it out somehow. This is, this is the same thing just at the business level, right?
Where you're saying, here's how we generate customers, here's how we keep customers, here's how we monetize customers and what our cost structure is. Here's the, the money we spend to make the product. Um, here's the money we spend to maintain the product, uh, and, and ultimately the money we spend to sell it. And then I'll just to run the business overall. And that leads to your income statement. And if you're not familiar with an income statement, you wanna spend a little bit of time, do a little research, take an accounting class, just, you know, when I, when I was young, so little known fact about me is that, I didn't mention this in my bio, but I, I'd spent a, a small amount of time doing m and a as an investment banker for software work companies. And so being forced to take an accounting class, it was one of those, you know, continuing education evening classes at nyu.
Um, it was, you know, uh, me and a bunch of people trying to become accountants. Uh, but it exposed me to those issues. And then I had to do a ton of modeling and valuation of, of businesses, but I learned a lot about that stuff. So you could take an accounting class, but there's a lot of research you could do on the internet, but you wanna understand how an income statement tells a story and what the pieces of it are. Uh, anyway, so the, an FP&A model is just a forecast. It's simply saying, given the pieces of our business, you know, here's what we think. Our top, middle and bottom line is gonna be going out some period of time. And a sophisticated one is not just a, as a range. Um, and you've got different controls, you have different variables that you can play with.
If you really wanna understand your business as a product person, you should honestly take a blank spreadsheet and just try to build this yourself. You know, you could start, some people, you know, hate spreadsheets. Our mutual friend Jeff Gothelf used to ruthlessly mock me cuz when I said that Excel was my favorite application. But, uh, take a big piece of paper, one of those, you know, 17 by 13 sheets of paper and create a flow chart, right? What's the flywheel of the business? What are the inputs and outputs? Understand the system, but then go into a spreadsheet and actually try to put some numbers to it. And you're gonna find some holes that you really don't understand, and you're gonna see some relationships. So you're like, okay, how are those, are those two things connected? Are these things random? It's gonna expose strength and weaknesses. I'm making this a long answer, sorry Melissa, but this is why I did it because, uh, I wanted to understand this stuff, uh, because I'm trying to figure out how, as an executive, am I impacting this.
Melissa:
No, I think that's incredibly important and I, I wanted you to go into more details. So I'm glad you gave us the, the lengthy response because I don't think people are familiar with these concepts or like, why should I worry about accounting? Like I'm the product person. Like I, my job is to work with developers, you know, we build things for users. And I've also noticed this thing, and I don't know if you've seen it, but I feel like when we, uh, started in the agile world and we got lean startup in there and all those things, and we graduating out of like waterfall into more agile methodologies, um, people had primarily been building things like business cases in product management.
Um, and business case has turned into like a dirty word. Uh, and when I go into organizations and I mentioned something about like, your initiatives should basically be a business case, um, of why you wanna go after that. Should it be 45 pages long based off of, you know, made up numbers? No. But can it be like a one pager on what our hypothesis is and the modeling work we've done for what we think on a high and low end that this could possibly do? Like yes. And that will help you prioritize. But I've gotten such visceral reactions when I mention the world word business case because people go, EW, waterfall. Like, no, we can't have this anymore.
Giff:
Yes. Well, similar, there's a whole separate conversation also on timelines and, uh, and thinking about dates. But on this, I'll just say this every time I haven't done it, and that's happened more than once, cuz I keep on making this mistake. I have regretted it. There was one time there was this, uh, company called the Electric Sheep Company. I was originally the VP of business development, uh, sort of just trying to get our revenue streams going. And, and then I switched over to run product design and engineering. And we were trying to build out a virtual, We, the, the company was in the virtual worlds in game space, and we were trying to build out a virtual goods marketplace. And I was working my butt off, my butt off trying to build the team, trying to grow the business, trying to get these new products out, working such long hours.
And I just didn't quite prioritize putting a model together about where this was going, a financial model about where this was going, and the 2008 crisis hit. And then that was a whole, I was also busy dealing with the emergencies around that. And then, lo and behold, the board called an emergency meeting and they wanted to understand the key initiatives, the expensive initiatives that the company was doing. And I had to present the next day. And so I stayed up most of the night putting together the model. I should have built ages before, you know, presented it. And, you know, because I was doing it in the middle of the night, I had, you know, I had holes in it. And so often, many, many board members come from the finance world. That's why they're on the board, right? They're investors, they're finance people, and they see numbers all the time.
They see spreadsheets all the time. And really, really great sort of financiers can spot a hole <laugh> in a model in a second. And they tore me apart. And I walked out of there feeling like the biggest fool, just, I'd lost so much face. Um, it, and I've done it again. You think, okay, after, after such a scar, how could you ever possibly do it again? But you get busy, right? It's all these things happening. You get busy. There's so many things to, um, every time I haven't done this, I've regretted it. The other time that I, I didn't do it was there was this other marketplace called Axial, which was, uh, an m and a marketplace. Um, given my background and m and a, you could understand why they wanted me as their head of product. And, uh, and so we had this feature that we need to build.
It was this matchmaking thing between buyers and sellers of businesses. And, uh, it, there was this feature of how you categorize businesses. Uh, basically what industry, uh, are you in? Are you in healthcare? What does that mean? No, no, you are radiology equipment company kind of thing. It was just their ontology, their taxonomy, whatever the right word is for it was really simplistic, which worked when they were a brand new startup. It did not work when I came into the business. Um, and everyone knew when I first got to the business, I talked to customers, I talked inside and outside the company saying, what's the biggest thing that's wrong here? And everyone pointed to this taxonomy as just holding everything back. But there was no, the company hadn't been able to do it, partially cuz they were afraid of the tech debt, but partially because there was no business justification for it, because of the way the company made money.
There was no way to say, If we work on this, it's going to lead to this lift in the revenue stream. Sounds crazy given that everyone's saying this is the biggest problem. But that was the case. And the reason why was actually what needed to happen was we needed to change the revenue model, but we couldn't do that before we, until we changed the taxonomy. I hope I'm not making this story too complicated. So ultimately we had to do A, then B, then C, and it was only C that was gonna lead to an outcome that a business person would go, Yeah, okay, I could do that. And because of that, because I knew that it was going to lead to business results, but it had to get through sort of these three steps and it felt so tenuous and it felt like such bullshit to create a model.
Now, I, I didn't do it. I know I was able to win over the ceo. Uh, we were able to redesign our strategy of how we did it, so we could do it in a lot less time. So I made it a much less painful thing to do. But, um, the CEO, to certain extent took a leap of faith with me rather than me having the numbers to back it up. I didn't get burned in this case, but I still looked back on that and said, No, no, no, I should have had the discipline to force myself to say, Okay, yes, it will feel like bullshit because it's extending out in the future. So many things have to happen for it to reap a return. But ultimately I'm doing this, I'm pushing for this as a product leader because it's going to lead to a return, it's gonna lead to greater retention, it's gonna lead to, um, greater revenue growth.
Okay, well, what's that gonna be? Just take a guess. Just take a guess. And the the thing is that I keep on having to remind myself is the answer is gonna be bullshit that comes out of that model, but the exercise of going through it is priceless. Absolutely priceless. And so, yeah, so, you know, I've been burned by not doing it, and then I have also had a not burn situation before. I also regretted doing it. So I always think you should do it. I mean, how about you, you, you've done this as well. You've been in this situation, you've had to build a zillion models, uh, to present to, you know, leaders and boards yourself. How, how did you get started doing this? Did you find any roadblocks and, and what are your stories about this?
Melissa:
Yeah. Um, I used to do it a little, so I guess I started a lot of this when I was, um, getting into like hypothesis testing when I started introducing that into, uh, product management because I was working for an eCommerce company, Open Sky that I talk about all the time. But, uh, when I had to convince our CEO like, we shouldn't be doing this, we should be doing this. Uh, I backed it out into all the numbers so that he could be like, Oh, this is giving a lift or this wasn't. And when in e-commerce it's, it's pretty easy to do that cuz they either buy the thing and they don't. Right. But that kind of got me started on bring this back to money, uh, you know, and most of the costs, I don't think I did it as, you know, ly rigorously <laugh> as I do now, um, at in those early days.
But it's still oriented my mind towards what are we gonna get from this from a, from a money perspective. Um, working with, you know, venture capitalist firms and working with a lot more companies like that, as I progressed in my career, made me really in tune to why those financials mattered. And also because valuations, I didn't understand how companies were valued for a very long time. So, you know, and I think a lot of people don't like they're, they're out there watching the news and they're like, Why is that thing worth a billion dollars? And they're making like a hundred million dollars a year. Like how did they get from X to Y in that situation? And once I started understanding more about valuations and how, um, you know, Wall Street values it and I, I did start, um, my career like working at Wall Street firms in New York as like a lot of us did because that's where we're from.
But, um, I had to go through all the, uh, the finance classes that we would do. So even though we were building software, I had to, you know, understand, um, I worked on like a fixed income product and all these things. So I had learned all that. I did a bunch of accounting in, um, accounting in something other class, in finance class in, in college too, even though I was an engineer. So I had a bunch of that basic understanding. But it took me a really long time I think, to figure out what were the keys when it comes to driving a software business and like how do those relate compared to other businesses? Cuz I find that many companies that we talk about sometimes we don't talk about how it goes into software and it confuses people, um, about how that's different than like something where you sell a good and you can just, you know, calculate the revenue off of one of those costs of goods sold.
How much does an Apple cost you sold in Apple? Right? Like, and those are the examples. So, um, as I progressed, I learned more about it in finance and I think that helped. And when I started really getting into modeling and stuff, it was when I kept running into executives who were like gung ho about doing one thing a certain way and building this product that they fell in love with. And I could tell like all my spidey senses and the data that I was gathering was telling me it's the wrong thing, but I was like, how do I convince them it's the wrong thing? If you could back that out into money, it works every time <laugh>. Like, so that's where I got really excited about that because I was like, oh, now I have a new tool to get people to not do this bad idea <laugh> and, um, or just prioritize. And that was a big thing. How do you prioritize one over the other?
Giff:
Yeah, we should definitely talk more about valuation. I agree with you. It's really important and it's an area that people don't understand. But one thing you just made me think of is when, when I was, uh, at Meetup, I was trying to explore how to improve or at least add on to the revenue model, the, the, uh, that the company had. Because, uh, what, what I found over my career, and maybe it's just because I spent a lot of time in marketplaces. I think I've done eight now, but, um, that actually nothing changes user behavior more than your pricing model. Not a feature. It's, it's how you price. And I think this actually works. Uh, it adds drag or, or, or greases the wheels on behaviors, um, in, in lots of different scenarios, uh, even in enterprise software, in other, other areas.
And so I was trying to explore, um, some ways of redesigning, maybe not for all of our customers, but for some of our customers, uh, the way that Meetup made money so that our customers and the company were better aligned. There was not, there was not good alignment. We couldn't make both successful, um, properly. And that's not a great relationship when, when both the customer and the company are being successful together, everyone's reinvesting, everyone's happy. Um, you gotta figure out the right balance, but, uh, but you really want both to be aligned. And it wasn't. So, I, I saw this one example, uh, sorry. We had this one idea that said, Okay, let's price it this way. Let's make it a more transactional based model. Let's price it this way. And it sounded great. And when you thought through the theory of it, uh, I can't remember exactly what it was.
Was it, you know, per event or I, I don't remember. But, um, the theory sounded good. When you, when you talk to is like, okay, right. I could see why an organizer would like that, an organizer of the meetups. I could see why the people attending the meetups would like it. I could see why we would like it, right? It, it took away some of the frictions that were bad and, and uh, and actually pushed people in some directions that were good. If we had just taken that idea and gone forward with it because it sounded so great, um, it would've been a real mess. Instead, what I said is, Okay, well, let's model this out. Um, so we pulled the numbers, we looked at the data, um, and it was terrible. <laugh>, It was absolutely terrible. It was gonna impact the tiny number of people, and it was gonna lead to, uh, either incremental or, or, or backwards movement on, on from the revenue perspective. Um, yeah. So it's the, again, I'm repeating myself, but do this exercise. It's always so useful.
Melissa:
Yeah. But yeah, it's so important because, you know, I feel like we all get into that mode of I think this is gonna work, this is gonna be great, and you get attached to your ideas, right? Like it's the most basic concept we talk about in product management, falling in love with your own ideas instead of testing it. Uh, but that happens every day and until you pull the numbers and actually look at it, it's not gonna tell you the truth. So even at, I feel like every level of the organization, we have to remember that even if we have bigger problems or smaller problems on a feature. Yeah.
Giff:
Yep, yep, yep. Yeah, that's right. I mean, the obvious disclaimer is that the numbers don't actually tell you the truth. They tell you a guess. You know, data is historical, It's not forward looking. It's looking at the past. So, you know, what happened in the past is not necessarily what's gonna happen in the future, but it's an input, it's an input into your decision. That's really key. There's still room for intuition. There's still room for judgment. There's still room for vision.
Melissa:
Yeah. And I think that's really important because, um, it's, it's a great point. You know, it's, it's a guess at the end of the day, you can't really predict the future, although you can reduce the risk around being totally off sometimes if you do good data. Um, but I find that when people are starting out on this journey to do the modeling we're talking about to, to put the data to it, there's a couple things that scare them. Like, one, they don't wanna commit to roundabout numbers because there's executives who probably don't think that's a guess and it's a guarantee. So it's like how, I guess when you're thinking about that to having had this conversation a bunch, how do you, how do you mitigate the executives coming back at you being like, you said we were gonna make $20,000 off of this and you know, we made 15. Like how do you manage conversations around, you know, around those types of things?
Giff:
Some of that's due to the trust and the, the, have you put in the effort with your relationships with the other executives to build trust. Um, and if everyone's a grown up and everyone has trust, then everyone is totally aware that these are guesses. Um, it, it only turns them to that like, finger pointing when there isn't trust, when there's like, you know, I don't really believe in what you're doing over there.
And you said it would be this, and it's not this so bang, like, I'm gonna nail you. Um, as opposed to, we've built a relationship, we're in this together. And an easy way to do it is if you're doing something, let's say, that's going to affect the sales numbers, and you're talking about this is, you know, this initiative is gonna lead to this percentage growth in sales, work with the head of sales to come up with what your inputs are, pull them into the process, co-design the model with them. They don't have to like get into Excel, like, you know, don't even have to show them the spreadsheet, but just like, talk about the inputs, talk about their engine. So pull them into the process to a certain certain extent. So there's really two parts to it, involve them, but it's also, it's all the groundwork of relationship building and trust building that goes into this stuff that keeps you out of trouble.
Melissa:
And you just brought up like such a good point that I, I just wanna reiterate because I don't want people to glance that over this. You don't have to build the models on your own and you probably shouldn't be, right? Because if you are just going <laugh> in a back room and making up about this is how the business works, I'm sure there's other people who are gonna disagree with you,
Giff:
No. Yeah. Yeah. People, you know, every company I've ever been at, uh, whether it's a startup or a much bigger one, the, the people who work in finance are constantly complaining about the lack of financial acumen and interest of the rest of the business. And if you express an interest and ask for their help in designing the model, in teaching you how to think about this stuff, chances are very high. Now, if you're a giant company, you go to the cfo, they're a little busy, but chances are very high, if you approach the right person that they're gonna say, Yes, let me help you. And, uh, and you'll start building a partnership.
Melissa:
There's a part of this too. I know you feel very passionate about this, about how as a product leader you need to do this work yourself and not just like assign it to somebody else. What, you know, I'm sure there's a lot of people who go, well, you know, maybe it's not worth it for me to learn the finance pieces of this. I'll just grab a finance person, have them number crunch it. Why do you believe it's so critical that you build these models yourself with people? Like you can have help on it, but like what's the why not just outsource it?
Giff:
Well, it's because it's all about the logic. Again, a spreadsheet, at the end of the day, people think it's about numbers of math. It's actually about logic. It's such a different programming language. And what a, and this is why I I actually say to people, don't grab a don't grab a template. Don't grab some sort of existing model that someone's built and fill it out, because that's not what you're there to do. It's not what you're trying to do. You're trying to think through the inputs and the outputs and to make sure you understand how it works. Because otherwise, your brain glosses over this stuff and you miss big things. You just, it's how our brains work. You will miss big things. And so the exercise of actually beginning with a blank spreadsheet, now, you don't have to build out a, you know, super complicated actually, you know, when you, when you're designing models, you can create something that's too simplistic, but you could also create something that's too complex.
Too much complexity is false truth, right? It seems really robust. It's just a load of bullshit, right? So you've gotta find what's practical, what's, what's the right level of, like, everything in product, right? You're going for the right level of simplicity, not too simple, not, not, not, uh, too complicated. And so maybe you just start modeling out a day or a month or like, like one column. Let me just work through one transaction, how whatever it is you're actually trying to think through, you don't have to then turn it into, It doesn't have to be you. That then turns it into the, the 12 month or 24 month forecast. So think about how you make it simple, but I'm, I'm just encouraging people to do this logic exercise now, Yes. Um, as an executive, you do need leverage, right? You need to be working with other people.
You can't be doing everything yourself. Um, uh, you have to decide what you do yourself, but you need to understand it. And so, if you are understanding something in finance, um, and it really, let's talk about impact, right? If you're designing something in your impact, sorry, you're understanding something about your impact or your outcomes, at a superficial level, that's a problem. So just make sure that you really get what's going on, um, if someone else is, is doing the work, um, that you understand the how and the why. But again, I encourage you, like, there's nothing scarier than having a blank spreadsheet. You're like, Oh, what goes in that cell? And how do those two things? And it exposes how much, how little you know, that you have to go then learn.
Melissa:
Hmm. Yeah. So when you do start with a blank spreadsheet, if like, let's pretend you're walking into a company, we'll go with b2b, uh, B2B SaaS company, where do you start with your blank spreadsheet? Like what's the first thing you wanna look at to start your model?
Giff:
Well, one I'm actually really starting with is I'm starting with conversations about how the business works. Uh, so, you know, I've spoken to people in marketing, I've spoken to people in sales, I've spoken to people in customer success. I'm understanding how the engine of the business in terms of how things, and I've looked at the metrics. I'm looking at the numbers. So now, now what I'm doing is I'm thinking about changing something, right? Okay? We have initiatives that are in theory, the pro, you know, if you're coming into a company, there's existing initiatives there. Those initiatives in theory are gonna have an impact. Do we have, do we have some guesses as to, um, the impact there have that they're gonna have? Do I believe those guesses? Do I understand how that's been modeled out? And for new initiatives, that's what you're doing. And so, you know, there's this sort of back and forth where it's like, okay, you get, you know, the head of sales says, Look, I've got these many, you know, BDRs, SDRs, and they make these many calls.
And those many calls turn to that many leads, and actually even begins with the marketing people, right? Because it starts with, they get the marketing qualified leads with insurance into the sales qualified leads with insurance, a certain number of, you know, uh, prospects, and then certain number of closes, and then certain amount of retention, right? So you gotta funnel, you know, so much of business, it's just a funnel. So much of product, it's just a funnel. So you've got, you understand your funnel, okay? How are you changing your funnel? Um, where are you making a dent? Where are you focusing on it? Um, you're gonna get that, those, those numbers from other people. The, the, again, the nice thing about that sort of this, this back and forth with the blank spreadsheet or the sheet of paper, again, you could draw it, It doesn't have to be in a spreadsheet.
You could start by drawing it if that's how your mind works, uh, better. A lot of people come into product from design and, uh, and they're more comfortable with a sharpie and a big white sheet of paper. I, I do both, honestly. Um, so you're getting these inputs, and now you gotta make sure you understand the flows of how it all works together. And then, and then maybe you bring, bring it back to those people and say, Is this right? You know, do does this work? Um, you do want to be thinking in terms of, uh, ranges. A couple things that I say to folks, uh, when we're, when we're on this topic, just to get tactical, is you never design a model. I guess we are going very deep into models, aren't we? Um, you never design a model that says like, Here's how it's gonna be, and here's like the answer.
You know, Uh, what, what's the number in, uh, uh, the ship Hit Checker's guide to the Universe? I don't remember what, it's 45, something like that. The answer's 45. Um, no, it's gonna be like, here's the best case scenario. Here's a middle, here's the worst. 42.
Melissa:
Mm-hmm. <affirmative>, I think it's 42. Yeah.
Giff:
Okay, there you go. Close with no cigar. Um, you're gonna have a range. And actually, it's such good training for everyone. You know, part of our job as product leaders is setting expectations, and part of setting expectations is understanding that there's a range of possible outcomes here. It might go in our favor, It might go against what is that range? You use this process to build out your ranges when whether you're designing the model or, or someone in finance is doing it for you. Make sure there's some variables you could play with to have a, some sort of ranges.
And so, yeah, working ranges not just like straight linear models. And the other thing, and this gets onto the communication of numbers side, is, um, when you're communicating what you've done, keep the actual model in your back pocket. You might be proud of it. You might have put a lot of work into it. Don't show it to other people. It's, it's, unless, unless you're getting, unless it's specifically to get feedback on the engine itself. You know, you don't present a detailed, you know, model to ceo, to a board. You present like the range of outcomes, like, okay, here are these key variables. Um, and like here is, uh, here's the roi, right? If we do the initiative, it's gonna be between 1.2 and 1.8. And by the way, here's a few, here's a little footnote with a few key assumptions that go into it. And if they want the detail, so you've give them just like the tldr, what's, what's the output of best case to worst case?
Um, key numbers, just a few, just a few numbers. Give them the tldr. And if they say, Okay, great, let me understand how you got to this point, then you can pull up the model. Um, and maybe that's with the bigger group. Sometimes I've, I've had boards wanna do that. Sometimes that's just with a board member. Uh, but, uh, but you keep the complexity in your back pocket. Actually, that's a good rule. Uh, for so much of what we do as product leaders, right? We do really complex work, um, how we engineer our products. Uh, it's like how we design it, the research that goes into it. So we really have to kind of obfuscate a lot of that complexity for our colleagues in the business and boil things down to the tldr. Like, let's get really simple. What's the narrative? What's the simple reason why we're doing this, and the outcome we're going for? And so, even though you're doing all this complex work, um, boil it down to something that is simple and have the complex work in your back pocket to help people understand how you got there. And people can call bullshit on this stuff, and don't get defensive about that, because of course, it's a guess. That's all it is. But it's better to have an informed guess on a decision than to fly blind. That's why, that's why we do this.
Melissa:
Yeah. I think that's one of the big mistakes I see when people are moving into executive leadership roles. Um, they get into the nitty gritty details of the features we're building instead of, you know, just kind of summing up what those larger initiatives are gonna do for the business and be like, we're on track, we're not, we're off track. We need this money, we need like what the asks are. Instead they dive into like every little experiment or, um, what the developers are doing and how this API is holding us up and how like, you know, all the technical implications of these things that people don't really care about. When you're an executive, you're like, I, you, you know, that's your job, you handle that, but like, tell me, tell me how it's gonna affect my job, which is managing this company for success from a financial outcome.
So I just realized too, we both talked about how nobody understands valuations and then we didn't tell people how anything was valued. So <laugh> I thought maybe, maybe we could talk about that, especially, you know, with your background in mergers and acquisitions, like what's the, if people wanna understand better about how their companies are valued, what should they look at first?
Giff:
Yeah. Absolutely. Yeah. The funny thing about this is that in business school, they teach, it's about, uh, discounted cash flows, and you gotta understand the discount rate and all this complexity, and I'm gonna get some MBAs up in arms here, but I stand by my words. It's so much simpler than that. Valuation is what someone's willing to pay for what you got. It's all about supply and demand. That's it. It's is. Now, all those techniques go into that number, but oftentimes they just get ignored. So often actually, uh, when you private equity folks, when you actually talk to a private equity investor, they're like, I don't do dcfs. It's like that kind of business that's five times ebitda. Now you need to know what EBITDA is and all this stuff, but, um, uh, go, go look up EBITDA on the internet if you don't know what it is.
Uh, but so there's really two things that affect your valuation. Um, there, there's, there's multiples. Your, your business is gonna get valued, um, with a multiple on either your top line or your bottom line. Um, and what the bottom line is, it can get a little wonky sometimes. This is a thing called EBIDA that I just mentioned. It could be on net income. Uh, EPS is a, is a multiple, uh, eps, which is used in the Wall Street, and the stock market is a version of, it's a multiple on net income, but, um, so it could be a multiple on your revenue or it could be a multiple on the bottom line. Very high growth companies, um, tend to have, there tend to be valued as multiples of revenue. And the reason why is that they're exciting for their high growth. And they're high growth because they're reinvesting huge amounts of money into that growth.
Usually they're losing money. So you can't, there is no multiple on the bottom line because it's negative. And investors are happily willing to allow a business to be negative because it's growing so fast, and they're happy with that as long as they believe that at some point in time it's going to change. Now, when I was CPO of Meetup, we were part of WeWork, so I was technically a WeWork employee. I was, I was, uh, CPO during that implosion of their ipo. Um, so WeWork was trying to get out on the markets, I dunno, like $80 billion. And, and the private markets, SoftBank and, and others had been willing to support that multiple because they'd been growing so fast. And they told a story about, you know, being a tech company, not a real estate company. And the public market said, Uhuh not so fast. And, and so all of a sudden that that sort of mirage of $80 billion dropped significantly, um, and the IPO got pulled and all of that stuff.
And so again, there was a group of people that said, I think you're worth this much. And there was another group of people that said, I don't think you're worth that much. Had nothing to do with the dcf. It had to do with like, who's doing the buying and how much they're willing to pay. Now, your, your multiples, uh, so lower growth companies are, are, are valued in the multiple of the bottom line. Higher growth companies tend to be valued as a multiple of revenue. I'm just making some generalizations. There's two ways of really growing how your business is, um, valued. One is sort of the linear way. So if you're valued at five times revenue and you're a $1 million revenue company, you're valued at $5 million. If you grow that to, um, $2 million, you double your business. That's 5 million times. Two, you've gone from a $5 million to a $10 million business.
Um, and a lot of companies, you're, you're doing that right now, Lemme just try to grow the business. Um, but the other way of, of improving how you're valued is you improve the multiple, You improve how people, what, what number they apply to your revenue, your or your, or your, um, bottom line. And that could be affected by how fast you're growing, what your gross margin is, uh, your market position, uh, how, how hot your space is. Uh, there's a lot of things that go into that. If you're able cyclicality of your business, the dependability of your business, like do you have a moat? If you're able to improve that, then you could actually have, um, a non-linear growth. So if you could take your, uh, right five, five times, uh, 1 million and turn that into a 10 times, you haven't grown your business at all, but all of a sudden you're a $10 million business on a $1 million revenue and you grow, now you grow that 1 million to 2 million like you did before.
Now you're a 20 million business. Um, and so you can get significant lift, uh, by changing your multiple and product. People say, Well, how do I affect that? Well, you can, you can, you can have dramatic impact on the, how the retention. Do you have really strong retention of your, of customers so that investors think this is a really dependable, predictable revenue stream. I'm gonna give them a premium. You can help with growth, you could help with cyclicality, you could help with all these things. And the one thing I say to people, uh, if, if you've ever wondered like, why the hell is my company doing this strange thing? Um, why are the executives, why is the board doing this strange thing? The answer is almost always that they are trying to either grow or protect the value of the business. It's often the protect like the weirdness, uh, comes in like I'm trying to protect the business.
But, um, so like thinking through this lens as an executive, as a superpower, because a CEO is thinking, How do I grow and protect the value of the business? The CFO is thinking, how do I protect and grow the value of the business and the board? That's all they care about is how do I grow and protect the value of this business? And if you're speaking that language, if you get the inputs into that, and if you, you know, I just rattled off a bunch of different things, but go talk to your CFO and your ceo. They know different businesses are valued in different ways. Good looks different in different industries, in different stages, different kinds of companies. So there's no general, it's like people saying, what's the one metric in product? Uh, no, that's a dumb question. Um, it's context specific. So go ask them, understand this stuff. It will give you a super power.
Melissa:
I think that's important and um, it explains why, you know, like you were saying why companies do some things where everybody's like, why would they possibly do that? Like, you're not doing what's in the best interest of our, like, for our product or our customers. Um, a great one I hear all the time is mergers and acquisitions, right? Why'd we buy that company? Why'd that come in here? Usually nobody's looking at how does that increase multiple or expand you from, you know, a market that you currently were in into like a completely new tam because you ex you know, just entered that market by acquiring a company and you didn't have to build anything for it. Um, but I sometimes think we, like we miss all those logics and the reasons behind it, so.
Giff:
Yeah. The private equity world has this thing called rollups. They'll, they'll buy a company. Um, so you get a premium on your valuation, the bigger you are, cuz you're considered kind of a safer company. So they'll, they'll buy, you know, I'm just gonna pick some numbers. Let's say they buy a $10 million business, let's say $20 million business. Then they go add a bunch of little $1 million businesses, uh, because they're trying to beef it up because they know if they can get it from that 20 million to, you know, a $40 million business, um, all of a sudden they're gonna change that multiple. It's not gonna be that linear growth evaluation anymore. They're gonna have this, this step function to a higher level because people are like, Oh, now you're a bigger company. I'm not gonna apply this multiple to you. I'm gonna apply a bigger one. There's so much of that going on. Uh, you ran into one, I remember when you were working with a private equity firm that came down to gross margin, whether an idea, I think whether an idea was, uh, or a company was good or bad based on gross margin. Do you wanna share that or have you already shared that on the podcast?
Melissa:
Hmm. Yeah, I don't think I have. Um, but I was, when I was working with, uh, yeah, like a private equity firm and there was two, there was a company that had been extremely high growth for a long time and the growth slowed. And what happened was the um, the partners in the private equity company started to freak out because they said, Oh, if it keeps going along this path, it's gonna be an EBITDA play instead of a high growth play. So we're gonna have to value it at different multiple. Um, and for them that was like suicide because it was, uh, you know, it was gonna take this company that they had invested all this money in and just bring its valuation completely down. So now they're not getting the returns on it. Um, so a big part of what we had to do was go in and figure out is there any opportunities here to return it to growth from a product perspective, Like what's causing it not to grow?
What did the, and and like you said, like a lot of this does come down into product, it comes back into why did your growth slow down? And some companies growth slows down because they won and they are the big company and they have achieved massive market share. And usually you don't hear the VCs or the private equity firms complain about that because they're huge, right? They're the Googles and the Amazons and they already made their money <laugh>. So, um, you won't hear like, Oh this company, it's so bad that it's not growing anymore. Um, when it's number one because it, it hit, it hit. Its like, you know, its peak. But there's a lot of, um, other ones where, you know, incumbents enter the market and you've got new competitors and they're just out innovating these companies that did have a strong foothold and it used to be number one and were growing like crazy.
But, um, because of, you know, poor prioritization or market shifts, uh, they can't keep up with them anymore and people are not looking at them. I think that's a big problem for some companies too. When you're so far ahead of other people, you're not really looking at who's catching up to me and then by the time they catch up it's too late. Uh, and then people will come and just out innovate you. Uh, so that was like my experience with that, which I thought was wild. Cuz I hadn't really, I didn't, I, you know, again, this was some of my early forays into valuations of companies, but everybody was screaming about like, Well God, we gotta like be careful and not value it, you know, based off, uh, EBITDA's now we gotta make sure that it's valued off of, you know, high growth. How do we keep it up there? And they were looking at anything they could do to make sure that it stayed in the growth, you know, range. Whether that was acquiring a company that was high growing that they could leverage to help beef it up. But those things I find used to confuse me when I wasn't paying attention to why are we making these decisions? And I like, I definitely was on the, that side of it once before where I was like, why would they buy that? That makes no sense. And then if you just keep bringing yourself up more levels into where are we going, um, how does this affect valuation? How does this affect our financials? You get your answer pretty quickly. Yeah. Mm-hmm. <affirmative>.
Giff:
I've, I've had a bunch of conversations with product leaders. I'm not gonna name names, who, and a common thread has been not realizing early enough how important what the, what the owner is of your business, how your business is owned. Because how a venture capitalist thinks versus, say, a family or family office versus a private equity firm versus the public markets. Those are very different. They, they care about different things. Um, they care about different risk thresholds. Uh, they, and, and, and they're going for different valuation outcomes. So usually the higher the valuation multiple and sort of return you're going for, the more risk you're willing to take. Cuz you have to take on that risk to, to get that outsized return. So VCs take on a lot of risk to try to get 10 x or more return.
Private equity firms take on much less, They're willing to take on much than they're aiming for two to four x a lot of times. And they, you know, VCs aren't happy unless they hit that high number. And the private equity guys are happy if they hit that lower number. Um, they're not going for the top number. So like, before you go into a business, um, you need to understand how is this thing owned? And so that's going to affect the decisions that you make. I have a version of the story you just shared when I was at Meetup. You know, we were owned by WeWork and then, uh, my last day was the day it was spun out, uh, into being, um, privately held again. And when we were going through that process, we had an innovation initiative that was quite exciting, super high growth.
Uh, and when we started it, all WeWork cared about was top line growth. Cuz that's, that's how they were valued. They, they didn't care about delivering, you know, uh, sort of anything to the bottom line of the income statements. They didn't care about profitability, spend, whatever you need to spend to get us growth and not small growth, big growth. Um, and they were rewarded for that for a long time until they weren't, and then they were punished. But, so during that phase, everyone was totally behind this project. It was a big success. The team was feted and, you know, we had this great little, uh, super elite tiger team working on this thing. Um, but it so happened that this team had really high revenue growth, but terrible gross margins. Uh, meaning that the money left over after the cost of delivering the product was much lower than in the normal software business.
Um, nor a really good SaaS, uh, or marketplace businesses. The gross margins are typically in the 75 to 85% range, and you get rewarded for being higher. Uh, this was more like 50% and that was fine as long as we were owned by WeWork. Uh, but all of a sudden we realized that, okay, when WeWork wasn't gonna hit their IPO, we knew that the company was gonna get spun out. It seemed very likely that it was gonna get spun out to a private equity firm. Most of the buyers these days are private equity firms, uh, rather than other companies. And, and a private equity company was gonna look at a 50% gross margin business dragging down. They're like, I don't care that this is adding to the top line. You're gonna kill my multiple because this, you're dragging down my average gross margins. The bigger this things get, the bigger this gets, the worse it is for me and this business. So this project went from being this great success in one context of an owner to being a dog, and it had to be killed. We had to kill it. And the team was in shock. They were like, Wait, why? Why do we have to kill it? And had to explain how this stuff works. So who owns the business and how they think about risk and returns and value is a really important sort of, again, leveling up step to becoming a cpo.
Melissa:
Yeah, it's huge. And then also I've worked for a lot of companies that were family run, um, in my, which is a whole nother animal. Um, because a lot of it is, you know, to me VCs, private equity funds, publicly traded companies are so straightforward to me cuz I'm like, there is some kind of revenue aspect at the end of this that they're trying to hit and that's great, but when you work for a family run organization, it's more like, oh, we just like showing up to work here every day. Like, we don't care if we make, you know, $10 million this year or $8 million doesn't really matter to us. And also like, I really would like my son to be the head of product, you know, so that's, that's, yeah and don't lose me money like, you know, like, and so, so just do that.
So a lot of it, and it's funny cuz sometimes family run companies though do have like a phenomenal culture and you'll see trade offs be made sometimes not towards money, but more towards the good of the company and the longevity of the company sometimes towards ego. And this is my baby and I wanna do what I wanna do and this is my little pet project, I've been running it for 20 years, so I'm gonna keep doing that. Uh, but to me, like family run companies are so much, like, so much more illogical <laugh>, I guess if you wanna say it that way. Uh, you have to really deeply understand who the family is and who's, who's the person and the family dynamics too, which is wild, um, to be able to tell that. Whereas like PE firms, VC firms publicly traded companies. I'm like, there's a market at the end of the day and a bunch of people wants money, like just make money and you're usually good, make money in the ways that they wanna make money and you're usually good. So that's something to look out for as well. And um, that's similar to, you know, a lot of startups that maybe are still owned by, you know, majority by the founders and not by the VCs and the PE firms. That's also like something to look forward to,
Giff:
Yes,Uh, I that we have a mutual friend, I won't, uh, name the name because, uh, I don't wanna throw anyone under the bus, but they worked for a company that was majority owned by the founder. Uh, a huge percentage of the founder's wealth was in this company, and they became staggeringly risk averse. All of a sudden they like wouldn't do anything. So they were like, they were challenging the team. I want more growth, come up with better ideas, and then they'd kill them all. They wouldn't, it's like, why is this happening? Why is this happening? Well, that's why it's happening. They've gotten scared. Yeah. Yeah.
Melissa:
Yeah. And, and that happens too. So it's really interesting when you get into like, I, I think that's just so important for every executive is to understand who's, you know, who's the one calling success at the end of the day? Is it a private equity firm? Is it a VC firm? Is it a family? Is it somebody in the family? Is it a founder? Um, and once you understand that a lot of these decisions just become so much more clear and you can figure out why, you know, why are we doing the things we're doing? And you can react to it, but without that knowledge, it's so hard to tell all those things.
Giff:
And again, just to, just to repeat, right, You don't have to have been a, a banker or have worked with tons of private equity firms like Melissa, go talk to your executives. Go talk to your cfo, your ceo, your head of products. Hopefully they, they are savvy on this issue and, and they'll start lifting the veil on these issues. Um, as I say, different companies are valued in different ways, and we just talked about how different owners act in different ways. So go understand your context.
Melissa:
I think that's wise words to leave off on. So give, if people wanna follow more of your work and learn more about you, where can they find you?
Giff:
Well, I'm, I have a website. I've been little quiet lately. I'm working at some writing projects, um, and I'm about to throw myself back into the work world. I've decided I go back to full-time, uh, full-time role, so I gotta go find the right fit. But, um, uh, Gifft constable.com, you've, there's a lot of stuff on, uh, on the blog that I've even talked about. A lot of these issues around finance, uh, in some of the recent posts also on Twitter, just at G I F F C O. Um, and, uh, did you find me there at Giff dot Constable at Gmail? If you wanna reach out, I, I'm often very happy to do a mentoring call with PMs, uh, that are, you know, out there and just wanna have a chat with people. So if I have to reach out and if I have time, I'll, I'll do my best to support.
Melissa:
Great, thank you so much and thanks for being on the podcast. Uh, for those of you out there listening, if you enjoyed this podcast, please leave us a review on Apple Podcast. That helps us a lot and we will be back next Wednesday with another Dear Melissa. So make sure that you go and submit all your questions for me at dearmelissa.com and I will get to answering them. We'll see you next time.